RETAIL VIEW: Peapod profitable as Amazon tests space

by Tim Linden | August 19, 2007

Amazon.com, which added some bulk grocery items to its product line last year, is now test marketing an on-line grocery delivery service, including some perishables, in a limited way near its Seattle headquarters. The on-line site is called AmazonFresh.

The company has picked Mercer Island, an upscale neighborhood in Lake Washington that connects Seattle and its eastern suburbs via a bridge, as its test market. The company has announced no timetable for the expansion of the service; rather it will evaluate this test effort as it goes along.

Amazon.com will offer several different delivery options including middle-of- the-night and one-hour windows throughout the day. The products will be delivered by refrigerated trucks in temperature-controlled containers and will carry a $10 delivery charge for orders less than $25. A list of products has not been published, but apples and other perishables are part of the mix.

The on-line grocery space has had some spectacular failures as well as a noted success story. Northern California-based Webvan threw millions of dollars at the concept in 1999 and 2000, but it crashed as the dot-com bubble burst in 2001.

Amazon.com also had a run at that market in 1999 with a major investment in HomeGrocer.com. Amazon.com sold HomeGrocer.com to Webvan in 2000 for stock prior to the collapse of that firm, which made the stock almost worthless.

One success story has been Peapod.com, perhaps the oldest on-line delivery service. The company started in Chicago in 1989 and now operates in 18 distinct marketing areas serving 280,000 customers per year, according to Elana Margolis, director of public relations for Peapod. Ms. Margolis said that both volume and dollar sales are increasing at a healthy rate of about 25 percent per year, with geographic expansion also on the rise.

"We will open up four new markets, but we have not yet announced those," she told The Produce News Aug. 15.

She said that the expansion would come in the company's core marketing area, which runs from the Virginia-Washington, DC, area to the Northeast corridor. "We started in the Chicago area and we had a warehouse there," Ms. Margolis said in explaining why Chicago is still part of the mix. "We were profitable in that area [when Peapod was purchased], so there was no reason to abandon that market."

Peapod was purchased by Royal Ahold in 2001, and its expansion has mirrored that retailer's strength in physical locations. Besides its Chicago warehouse, Peapod has a dedicated warehouse in the Washington, DC, area and operates from 16 other "warerooms" that are housed in Royal Ahold's partner stores of Stop & Shop and Giant Supermarket.

The company spokesperson said that the average Peapod order is a bit more than $150. Delivery fees are as low as $6.95 for orders greater than $100, and $9.95 for orders between $50 and $100. Chicago and Washington, DC- area customers have an additional price option of $7.95 for orders between $75 and $100.

The company serves close to 1,700 zip codes. Once assembled, customer orders are packed in bags and special temperature-controlled, crush-proof containers. Most orders are filled the following day within a two-hour window, and the typical customer orders every other week.

Peapod believes that the on-line grocery business continues to have great potential, so Ms. Margolis said that the company welcomes the publicity being generated by Amazon.com's entry into the marketplace. She said that Amazon's expansion into grocery items last year did not affect the firm, as Amazon.com was selling bulk product, which Peapod does not sell.

Ms. Margolis said that Peapod was not surprised by Amazon.com's foray into perishable items, and she conceded that the on-line giant could eventually become a direct competitor of Peapod.

Peapod does compete directly in specific zip codes with regional operators, as well as with on-line services from Safeway and other brick-and-mortar stores, Ms. Margolis said.

In press reports, Amazon.com opined that it was very well situated to serve its millions of customers with grocery products. "We've been serving customers with gourmet food since 2003 and groceries since last year," company spokesperson Craig Berman said in a couple of different stories. "We've learned a lot from that. With this effort, we're starting small and we'll expand when we feel that the experience is what customers expect from us."

The company is test marketing on Mercer Island with a refrigerated warehouse in the Seattle area and a dozen trucks. Mr. Berman, who did not return a phone call from this reporter by press time, said in other reports that the plan to expand into other on-line grocery products came about because of customer requests.

"For quite a while, customers have been asking us, 'When am I going to be able to buy eggs from Amazon, when am I going to be able to buy fresh fruit?'" he was quoted as saying. "Taking that feedback, what you see now is AmazonFresh. We're in an early stage of a beta test of a service providing fresh, frozen and perishable goods to our customers."